GAO

United States General Accounting Office

A

Testimony

Before Subcommittees of the Senate Committee on 

Governmental Affairs and the House Committee on 

Government Reform

For Release on Delivery

Expected at 10:00 a.m. EST

Wednesday, February 25, 2004

HUMAN CAPITAL 

Preliminary Observations 

on Proposed DHS Human 

Capital Regulations 

Statement of David M. Walker

Comptroller General of the United States

GAO-04-479T
The proposed human capital system is designed to be aligned with the 

department’s mission requirements and is intended to protect the civil 

service rights of DHS employees. Many of the basic principles underlying 

the DHS regulations are consistent with proven approaches to strategic 

human capital management, including several approaches pioneered by 

GAO, and deserve serious consideration. However, some parts of the system 

raise questions that DHS, OPM, and Congress should consider. 

• Pay and performance management: The proposal takes another valuable 

step towards results-oriented pay reform and modern performance 

management. For effective performance management, DHS should use 

validated core competencies as a key part of evaluating individual 

contributions to departmental results and transformation efforts. 

• Adverse actions and appeals: The proposal would retain an avenue for 

employees to appeal adverse actions to an independent third party. 

However, the process to identify mandatory removal offenses must be 

collaborative and transparent. DHS needs to be cautious about defining 

specific actions requiring employee removal and learn from the Internal 

Revenue Service’s implementation of its mandatory removal provisions. 

• Labor relations: The regulations recognize employees’ right to organize 

and bargain collectively, but reduce areas subject to bargaining. 

Continuing to involve employees in a meaningful manner is critical to the 

successful operations of the department. 

Once DHS issues final regulations for the human capital system, it will be 

faced with multiple implementation challenges: 

• DHS plans to implement the system using a phased approach, however, 

nearly half of DHS civilian employees are not covered by these 

regulations, including more than 50,000 Transportation Security 

Administration screeners. To help build a unified culture, DHS should 

consider moving all of its employees under a single performance 

management system framework. 

• DHS noted that it estimates that about $110 million will be needed to 

implement the new system in its first year. While adequate resources for 

program implementation are critical to program success, DHS is 

requesting a substantial amount of funding that warrants close scrutiny 

by Congress. 

• The proposed regulations call for comprehensive, ongoing evaluations. 

Continued evaluation and adjustments will help to ensure an effective 

and credible human capital system. 

• DHS has begun to develop a strategic workforce plan. Such a plan can 

be used as a tool for identifying core competencies for staff for 

attracting, developing, evaluating, and rewarding contributions to 

mission accomplishment. 

The analysis of DHS’s effort to develop a strategic human capital 

management system can be instructive as other agencies request and 

implement new strategic human capital management authorities. 

The creation of the Department of 

Homeland Security (DHS) almost 

one year ago represents an historic 

moment for the federal government 

to fundamentally transform how 

the nation will protect itself from 

terrorism. DHS is continuing to 

transform and integrate a disparate 

group of agencies with multiple 

missions, values, and cultures into 

a strong and effective cabinet 

department. Together with this 

unique opportunity, however, also 

comes significant risk to the nation 

that could occur if this 

transformation is not implemented 

successfully. In fact, GAO 

designated this implementation and 

transformation as high risk in 

January 2003. 

Congress provided DHS with 

significant flexibility to design a 

modern human capital 

management system. GAO 

reported in September 2003 that 

the design effort to develop the 

system was collaborative and 

consistent with positive elements 

of transformation. Last Friday, the 

Secretary of DHS and the Director 

of the Office of Personnel 

Management (OPM) released for 

public comment draft regulations 

for DHS’s new human capital 

system. This testimony provides 

preliminary observations on 

selected major provisions of the 

proposed system. The 

subcommittees are also releasing 

Human Capital: Implementing 

Pay for Performance at Selected 

Personnel Demonstration Projects

(GAO-04-83) at today’s hearing. 

www.gao.gov/cgi-bin/getrpt?GAO-04-479T.

To view the full testimony statement, click on 

the link above. For more information, contact 

J. Christopher Mihm at (202) 512-6806 or 

mihmj@gao.gov. 

Highlights of GAO-04-479T, testimony 

before subcommittees of the Senate 

Committee on Governmental Affairs and 

the House Committee on Government 

Reform 

February 25, 2004 

HUMAN CAPITAL

Preliminary Observations on Proposed 

DHS Human Capital Regulations 
Page 1 GAO-04-479T 

Chairman Voinovich, Chairwoman Davis, and Members of the 

Subcommittees: 

It is a pleasure to appear before you today to provide our preliminary 

observations on the Department of Homeland Security’s (DHS) proposed 

regulations on its new human capital system.1

 The creation of DHS almost 

one year ago represents an historic moment for the federal government to 

fundamentally transform how the nation will protect itself from terrorism. 

DHS is continuing to transform and integrate a disparate group of agencies 

with multiple missions, values, and cultures into a strong and effective 

cabinet department. However, this unique opportunity also brings 

significant risk to the nation if this transformation is not implemented 

successfully. In fact, we designated this implementation and 

transformation as high risk in January 2003.2

Last Friday, the Secretary of DHS and the Director of the Office of 

Personnel Management (OPM) released for public comment proposed 

regulations for DHS’s new human capital system. The regulations are 

intended to provide the broad outline of the DHS proposed system and are 

not, nor were they intended to be, a comprehensive presentation of the 

details of how the new system will be implemented. As the system evolves, 

critical issues such as how DHS will link individual performance 

expectations to DHS’s mission and goals, how it will define performance 

expectations to promote individual accountability, and how it will 

continue to incorporate adequate safeguards to ensure fairness, will need 

to be addressed. Such detailed implementation policies and procedures 

will need to be developed in a transparent and inclusive manner as the 

system evolves. Although we are still reviewing these extensive 

regulations issued last week, this morning I will provide some preliminary 

observations on selected provisions that in our view are most in need of 

close scrutiny as Congress considers the DHS proposal. 

The proposed DHS regulations have both significant precedent-setting 

implications for the executive branch and far-reaching implications on 

how the department is managed. In my view, many of the basic principles 

 1

Senate Committee on Governmental Affairs, Subcommittee on Oversight of Government 

Management, the Federal Workforce, and the District of Columbia and House Committee 

on Government Reform, Subcommittee on Civil Service and Agency Organization. 

2

U.S. General Accounting Office, Major Management Challenges and Program Risks: 

Department of Homeland Security, GAO-03-102 (Washington, D.C.: January 2003). 
Page 2 GAO-04-479T 

underlying the proposed DHS regulations are consistent with proven 

approaches to strategic human capital management, including several 

approaches pioneered by GAO, and deserve serious consideration. In 

designing the proposed system, DHS and OPM met with a wide range of 

individuals and organizations with expertise in human capital. At the 

request of DHS and OPM, we were pleased to share the results of our work 

looking at leading human capital practices as well as our own experiences 

with performance management at GAO. My statement today is based on 

our ongoing review of DHS’s design and implementation of its human 

capital system, recent work on strategic human capital management, 

including performance management, and our own experience. 

DHS’s and OPM’s proposed regulations would establish a new human 

resources management system within DHS that covers pay, classification, 

performance management, labor relations, adverse action, and employee 

appeals. These changes are designed to ensure that the system aligns 

individual performance and pay with the department’s critical mission 

requirements and to protect the civil service rights of its employees. 

However, it is important to note at the outset that the proposed 

regulations do not apply to nearly half of all DHS civilian employees, 

including nearly 50,000 screeners in the Transportation Security 

Administration (TSA). DHS officials have noted that additional employees 

can be included through further administrative action, but that legislation 

would be needed to include other employees such as the screeners and the 

uniformed division of the Secret Service.3

 We have found that having one 

performance management system framework facilitates unifying an 

organizational culture and is a key practice to a successful merger and 

transformation. Based on the department’s progress in implementing the 

system and any appropriate modifications made based on their 

experience, DHS should consider moving all of its employees under the 

new human capital system. 

 3

The Homeland Security Act of 2002 gave DHS authority to waive or modify parts of civil 

service law in Title 5 of the U.S. Code. However, not all employees of DHS are covered 

under Title 5. According to DHS officials, this impacts coverage of TSA, part of the Coast 

Guard, the Uniformed Division of the Secret Service, and part of the Emergency 

Preparedness and Response Directorate. These same DHS officials indicated that DHS can 

administratively extend the new human capital system to many of these employees. 

However, they said that legislation would be required to move TSA screeners and Secret 

Service uniformed employees completely into the new system. 

Preliminary 

Observations on the 

Proposed Human 

Capital Regulations 
Page 3 GAO-04-479T 

Today, Mr. Chairman and Madam Chairwoman, you are releasing a report 

that we prepared at your request that shows the variety of approaches that 

OPM’s personnel demonstration projects took to design and implement 

their pay for performance systems.4 Their experiences provide insights 

into how some organizations in the federal government are implementing 

pay for performance and thus can guide DHS as it develops and 

implements its own approach. These demonstration projects illustrate that 

understanding how to link pay to performance is very much a work in 

progress in the federal government and that additional work is needed to 

ensure that performance management systems are tools to help them 

manage on a day-to-day basis and achieve external results. 

As we testified last spring when the Department of Defense (DOD) 

proposed its civilian personnel reform, from a conceptual standpoint, we 

strongly support the need to expand pay for performance in the federal 

government.5

 Establishing a better link between individual pay and 

performance is essential if we expect to maximize the performance and 

ensure the accountability of the federal government for the benefit of the 

American people. However, how it is done, when it is done, and the basis 

on which it is done can make all the difference in whether such efforts are 

successful. The DHS proposal reflects a growing understanding that the 

federal government needs to fundamentally rethink its current approach to 

pay and better link pay to individual and organization performance. To this 

end, the DHS proposal takes another valuable step towards resultsoriented pay reform and modern performance management. My comments 

on specific provisions follow. 

Under the proposed regulations, the DHS performance management 

system must, among other things, align individual performance 

expectations with the mission, strategic goals, or a range of other 

objectives of the department or of the DHS components. The proposed 

guidelines do not detail how such an alignment is to be achieved, a vital 

issue that will need to be addressed as DHS’s efforts move forward. Our 

work looking at public sector performance management efforts here in the 

United States as well as abroad have underscored the importance of 

 4

U.S. General Accounting Office, Human Capital: Implementing Pay for Performance at 

Selected Personnel Demonstration Projects, GAO-04-83 (Washington, D.C.: Jan. 23, 2004). 

5

U.S. General Accounting Office, Defense Transformation: Preliminary Observations on 

DOD’s Proposed Civilian Personnel Reforms, GAO-03-717T (Washington, D.C.: Apr. 29, 

2003). 

Pay and Performance 

Management 

Linking Organizational Goals to 

Individual Performance 
Page 4 GAO-04-479T 

aligning daily operations and activities with organizational results. We 

have found that organizations often struggle with clearly understanding 

how what they do on a day-to-day basis contributes to overall 

organizational results. High performing organizations, on the other hand, 

understand how the products and services they deliver contribute to 

results by aligning performance expectations of top leadership with 

organizational goals and then cascading those expectations to lower 

levels. 

As an organization undergoing its own merger and transformation, DHS’s 

revised performance management system can be a vital tool for aligning 

the organization with desired results and creating a “line of sight” showing 

how team, unit, and individual performance can contribute to overall 

organizational results. To help DHS merge its various originating 

components into a unified department and transform its culture to be 

more results oriented, customer focused, and collaborative in nature, we 

reported at your request, Mr. Chairman and Madam Chairwoman, how a 

performance management system that defines responsibility and assures 

accountability for change can be key to a successful merger and 

transformation.6

 While aligning individual performance expectations with 

DHS’s mission and strategic goals will be key to DHS’s effective 

performance management, it is important to note that DHS has not yet 

released its strategic plan which may hamper creating the formal linkage 

to the performance management system and make it difficult to ensure 

that the proposed regulations support and facilitate the accomplishment of 

the department’s strategic goals and objectives. 

Under the proposed regulations, DHS would create broad pay bands for 

much of the department in place of the fifteen-grade General Schedule 

(GS) system now in place for much of the civil service. Specifically, DHS 

officials have indicated that they will form ten to fifteen occupational pay 

clusters of similar job types, such as a management or science and 

technology cluster. Most of these occupational clusters would have four 

pay bands ranging from entry level to supervisor. Within each 

occupational cluster, promotion to another band (such as from full 

performance to senior expert) would require an assessment and/or 

competition. Under the proposed regulations, DHS is not to reduce 

 6

U.S. General Accounting Office, Results-Oriented Cultures: Implementation Steps to 

Assist Mergers and Organizational Transformations, GAO-03-669 (Washington, D.C.: July 

2, 2003). 

Establishing Pay Bands 
Page 5 GAO-04-479T 

employees’ basic rate of pay when converting to pay bands. In addition, 

the proposed regulations would allow DHS to establish a “control point” 

within a band, beyond which basic pay increases may be granted only for 

meeting criteria established by DHS, such as an outstanding performance 

rating. 

The use of control points can be a valuable tool because managing 

progression through the bands can help to ensure that employees’ 

performance coincides with their salaries and can help to prevent all 

employees from eventually migrating to the top of the band and thus 

increasing salary costs. Both demonstration projects at China Lake and the 

Naval Sea Systems Command Warfare Center’s (NAVSEA) Dahlgren 

Division have checkpoints or “speed bumps” in their pay bands designed 

to ensure that only the highest performers move into the upper half of the 

pay band. For example, when employees’ salaries at China Lake reach the 

midpoint of the pay band, they must receive a performance rating 

equivalent to exceeding expectations, before they can receive additional 

salary increases. 

Pay banding and movement to broader occupational clusters can both 

facilitate DHS’s movement to a pay for performance system, and help DHS 

to better define occupations, which can improve the hiring process. We 

have reported that the current GS system as defined in the Classification 

Act of 1949 is a key barrier to comprehensive human capital reform and 

the creation of broader occupational job clusters and pay bands would aid 

other agencies as they seek to modernize their personnel systems.7

 The 

standards and process of the current classification system is a key 

problem in federal hiring efforts because they are outdated and not 

applicable to the occupations and work of today. Many employees in 

agencies that are now a part of DHS responding to OPM’s 2002 Federal 

 7

U.S. General Accounting Office, Human Capital: Opportunities to Improve Executive 

Agencies’ Hiring Processes, GAO-03-450 (Washington, D.C.: May 30, 2003). 
Page 6 GAO-04-479T 

Human Capital Survey (FHCS) believe that recruiting is a problem – only 

36 percent believe their work unit is able to recruit people with the right 

skills. 8

 

The DHS performance management system is intended to promote 

individual accountability by communicating performance expectations 

and holding employees responsible for accomplishing them and by holding 

supervisors and managers responsible for effectively managing the 

performance of employees under their supervision. While supervisors are 

to involve employees as far as practicable in developing their performance 

expectations and employees seek clarification if they do not understand 

them, the final decision on an employee’s expectations is the supervisor’s 

sole and exclusive discretion. Supervisors must monitor the performance 

of their employees and provide periodic feedback, including one or more 

formal interim performance reviews during the appraisal period. 

The proposed regulations provide a general description of DHS’s 

performance management system with many important details to be 

determined. Under the proposed regulations, performance expectations 

may take the form of goals or objectives that set general or specific 

performance targets at the individual, team, and/or organizational level; a 

particular work assignment, including characteristics such as quality, 

accuracy, or timeliness; or competencies an employee is expected to 

demonstrate on the job; and/or the contributions an employee is expected 

to make, among other things. As DHS’s system design efforts move 

forward, it will need to define in further detail than currently provided 

how performance expectations will be established, including the degree to 

which DHS components, managers, and supervisors will have flexibility in 

setting those expectations. 

Nevertheless, the range of expectations that DHS will consider in setting 

individual employee performance expectations are generally consistent 

with those we see used by leading organizations. In addition, DHS 

appropriately recognizes that given the vast diversity of work done in the 

Department, managers and employees need flexibility in crafting specific 

 8

The DHS responses reported by the OPM FHCS approximate the views of some, but not 

all, employees now at DHS. For example, TSA screeners were not hired at the time of the 

survey. Also, though the Animal and Plant Health Inspection Services (APHIS) employees 

were divided between DHS and the U.S. Department of Agriculture (USDA), the APHIS 

respondents included those remaining at USDA. Details on the objective, scope, and 

methodology for the OPM FHCS are described in more detail in app I. 

Setting Employee Performance 

Expectations 
Page 7 GAO-04-479T 

expectations. However, the experiences of leading organizations suggest 

that DHS should reconsider its position to merely allow, rather than 

require the use of core employee competencies as a central feature of 

DHS’s performance management efforts.9 Based on our review of others’ 

efforts and our own experience at GAO, core competencies can help 

reinforce employee behaviors and actions that support the department’s 

mission, goals, and values and can provide a consistent message to 

employees about how they are expected to achieve results. For example, 

the Civilian Acquisition Workforce Personnel Demonstration Project 

(AcqDemo), which covers various organizational units of the Air Force, 

Army, Navy, Marine Corps, and the Office of the Under Secretary of 

Defense, applies organizationwide competencies for all employees such as 

teamwork/cooperation, customer relations, leadership/supervision, and 

communication. 

More specifically and consistent with leading practices for successful 

mergers and organizational transformation, DHS should use its 

performance management system to serve as the basis for setting 

expectations for individual roles in its transformation process.10 To be 

successful, transformation efforts, such as the one underway at DHS, must 

have leaders, managers, and employees who have the individual 

competencies to integrate and create synergy among multiple 

organizations involved in the transformation effort. Individual 

performance and contributions can be evaluated on competencies such as 

change management, cultural sensitivity, teamwork and collaboration, and 

information sharing. Leaders, managers, and employees who demonstrate 

these competencies are rewarded for their success in contributing to the 

achievement of the transformation process. DHS, by including such 

competencies throughout its revised performance management system, 

would create a shared responsibility for organizational success and help 

assure accountability for change. 

A stated purpose of DHS’s performance management system is to provide 

for meaningful distinctions in performance to support adjustments in pay, 

awards, and promotions. All employees who meet organizational 

expectations are to receive pay adjustments, generally to be made on an 

annual basis. In coordination with OPM, the pay adjustment is to be based 

 9

U.S. General Accounting Office, Creating a Clear Linkage between Individual 

Performance and Organizational Success, GAO-03-488 (Washington, D.C.: Mar. 14, 2003). 

10GAO-03-669. 

Translating Employee 

Performance Ratings into Pay 

Increases and Awards 
Page 8 GAO-04-479T 

on considerations of mission requirements, labor market conditions, 

availability of funds, pay adjustments received by other federal employees, 

and other factors. The pay adjustment may vary by occupational cluster or 

band. Employees that meet or exceed expectations are also eligible to 

receive a performance-based pay increase, either as an increase to base 

pay or a one-time award, depending on the employee’s performance rating. 

Employees with unacceptable ratings are not to receive the pay 

adjustment or a performance-based pay increase. The proposed 

regulations provide managers with a range of options for dealing with poor 

performers, such as remedial training, reassignment, an improvement 

period, among other things. 

In coordination with OPM, DHS may additionally set the boundaries of 

locality pay areas. Participants in the DHS focus groups expressed 

concerns regarding the shortcomings of the current locality pay system, 

including its impact on recruitment and retention.11

While the DHS proposal does not provide additional detail on how it 

would consider labor market conditions, its proposed approach is broadly 

consistent with the experiences of some of the demonstration projects 

that considered the labor market or the fiscal condition of the organization 

in determining how much to budget for pay increases. For example, 

NAVSEA’s Newport Division considers the labor market and uses regional 

and industry salary information compiled by the American Association of 

Engineering Societies when determining how much to set aside for pay 

increases and awards. In addition, the Newport Division is financed in part 

through a working capital fund and thus must take into account fiscal 

condition when budgeting for pay increases and awards. Responding to 

higher salaries in the labor market, the Newport Division funded pay 

increases at a higher rate in fiscal year 2001 than in 2000. Conversely, in 

fiscal year 2002, the performance pay increase and award pools were 

funded at lower levels than in 2001 because of fiscal constraints. 

Under the proposed regulations, DHS would establish performance pay 

pools by occupational cluster and by band within each cluster, and may 

further divide them by unit and/or location. Performance-based pay would 

be based on “performance points” whereby points correspond to a rating 

level. In an example used by DHS, for a four-level system, the point value 

 11Details on the objective, scope, and methodology for the DHS focus groups are described 

in more detail in app. I. 
Page 9 GAO-04-479T 

pattern may be 4-2-1-0, where 4 points are assigned to the highest rating 

and 0 points to an unacceptable rating. While each pay pool has the option 

to use this point value pattern or another, DHS is to determine the value of 

a performance point. The proposed regulations do not provide more 

detailed information on how ratings will be used for pay and promotions. 

Under the proposed regulations, DHS may not impose a quota on any 

rating level or a mandatory distribution of ratings. DHS would create a 

Performance Review Board (PRB) to review ratings in order to promote 

consistency and provide general oversight of the performance 

management system to ensure it is administered in a fair, credible, and 

transparent manner. DHS may, in turn, appoint as many review boards 

within the departmental components as it deems necessary to effectively 

carry out these intended functions and, when practicable, may include 

employees outside the organizational unit, occupation, and/or location of 

employees subject to review by the PRB. The proposed regulations do not 

offer additional details on other matters such as the selection process for 

the members nor their qualifications. Where circumstances warrant, the 

PRB may remand individual ratings for additional review and/or modify a 

rating. 

While much remains to be determined about how the DHS PRB will 

operate, we believe that the effective implementation of such a board is 

important to assuring that predecisional internal safeguards exist to help 

achieve consistency and equity, and assure nondiscrimination and 

nonpolitization of the performance management process. The key will be 

to create a PRB that is independent of line management and review such 

matters as the establishment and implementation of the performance 

appraisal system and later, performance rating decisions, pay 

determinations, and promotion actions before they are finalized to ensure 

they are merit based. 

Several of the demonstration projects consider an employee’s current 

salary when making decisions on permanent pay increases and one-time 

awards – a procedure that is worth additional consideration in the 

proposed DHS regulations. By considering salary in such decisions, the 

projects intend to make a better match between an employee’s 

compensation and his or her contribution to the organization. Thus, two 

employees with comparable contributions could receive different pay 

increases and awards depending on their current salaries. For example, at 

AcqDemo, supervisors recommend and pay pool managers approve 

employees’ “contribution scores.” Pay pool managers then plot 

contribution scores against the employees’ current salaries and a 
Page 10 GAO-04-479T 

“standard pay line” to determine if employees are “appropriately 

compensated,” “under-compensated” or “over-compensated,” given their 

contributions. 

As a result of this system, AcqDemo has reported that it has made progress 

in matching employees’ compensation to their contributions to the 

organization. From 1999 to 2002, appropriately compensated employees 

increased from about 63 percent to about 72 percent, under-compensated 

employees decreased from about 30 percent to about 27 percent and overcompensated employees decreased from nearly 7 percent to less than 2 

percent. A recent evaluation of AcqDemo by Cubic Applications, Inc. 

found that employees’ perceptions of the link between pay and 

contribution increased, from 20 percent reporting that pay raises depend 

on their contribution to the organization’s mission in 1998 to 59 percent in 

2003. 

According to the proposed regulations, the DHS performance management 

system must comply with the merit system principles and avoid prohibited 

personnel practices; provide a means for employee involvement in the 

design and implementation of the system; and overall, be fair, credible, 

and transparent. Last spring, when commenting on the DOD civilian 

personnel reforms, we testified that Congress should consider establishing 

statutory standards that an agency must have in place before it can 

implement a more performance-based pay program and developed an 

initial list of possible safeguards to help ensure that pay for performance 

systems in the government are fair, effective, and credible.12

While much remains to be defined, DHS is proposing taking actions that 

are generally consistent with these proposed safeguards. For example, as I 

noted previously, DHS plans to align individual performance management 

with organizational goals and provide for reasonableness reviews of 

performance management decisions through its PRB. Moreover, 

employees and their union representatives played a role in shaping the 

design of the proposed systems, as we previously reported.13

 12GAO-03-717T. 

13U.S. General Accounting Office, Human Capital: DHS Personnel System Design Effort 

Provides for Collaboration and Employee Participation, GAO-03-1099 (Washington, D.C.: 

Sept. 30, 2003). 

Providing Adequate Safeguards 

to Ensure Fairness and Guard 

Against Abuse 
Page 11 GAO-04-479T 

DHS should continue to build in safeguards into its revised performance 

management system. For example, we noted that agencies need to assure 

reasonable transparency and provide appropriate accountability 

mechanisms in connection with the results of the performance 

management process. This can include publishing overall results of 

performance management and individual pay decisions while protecting 

individual confidentiality and reporting periodically on internal 

assessments and employee survey results relating to the performance 

management system. DHS should commit to publishing the results of the 

performance management process. Publishing the results in a manner that 

protects individual confidentiality can provide employees with the 

information they need to better understand the performance management 

system. Several of the demonstration projects publish information for 

employees on internal Web sites about the results of performance 

appraisal and pay decisions, such as the average performance rating, the 

average pay increase, and the average award for the organization and for 

each individual unit. 

The DHS proposal is intended to streamline the employee adverse action 

process, while maintaining an independent third-party review of most 

adverse actions. It is designed to create a single process for both 

performance-based and conduct-based actions,14 and shortens the adverse 

action process by removing the requirement for a performance 

improvement plan and reducing other timeframes. The proposed 

regulations also adopt the lower standard of proof for adverse actions in 

DHS, requiring the agency to meet a standard of “substantial evidence” 

instead of a “preponderance of the evidence.” An independent review is to 

be retained by allowing employees to appeal to the Merit Systems 

Protection Board (MSPB). The appeals process at MSPB is, however, to 

be streamlined by shortening the time for filing and processing appeals. 

The proposal also encourages the use of Alternative Dispute Resolution 

(ADR). 

 14Title 5 has a process for performance-based actions in Chapter 43 and a different process 

in Chapter 75 which can be used for conduct or performance-based actions. 

Adverse Actions and 

Appeals 
Page 12 GAO-04-479T 

Retention of a qualified and independent third-party to address employee 

appeals may be especially important in light of OPM’s FHCS results. 

Specifically, 

• 38 percent of DHS respondents believe that complaints, disputes, or 

grievances are resolved fairly – lower than the governmentwide 

response of 44 percent;15 and 

• 38 percent of DHS respondents perceive that arbitrary action, personal 

favoritism, and coercion for partisan political purposes are not 

tolerated – lower than the governmentwide response of 45 percent. 

Providing an avenue for an independent appeal can enhance employee 

trust of the entire human capital system. The point was echoed during the 

DHS focus groups, in which employees and managers believed it was 

important to maintain a neutral third-party reviewer in the appeals 

process. In a separate survey that we administered (GAO survey), 

members of the field team identified the presence of a neutral third-party 

in the process as the most critical challenge in terms of the discipline and 

appeals system, while others identified options retaining a third-party 

reviewer as most likely to address the department’s challenges in 

discipline and appeals.16

DHS’s commitment to use ADR is a very positive development. To resolve 

disputes in a more efficient, timely, and less adversarial manner, federal 

agencies have been expanding their human capital programs to include 

ADR approaches. These approaches include mediation, dispute resolution 

boards and ombudsmen. Ombudsmen are typically used to provide an 

informal alternative to addressing conflicts. We reported on common 

approaches used in ombudsmen offices, including (1) broad responsibility 

and authority to address almost any workplace issue, (2) their ability to 

bring systemic issues to management’s attention, and (3) the manner in 

which they work with other agency offices in providing assistance to 

 15In all instances comparing DHS’s results to the OPM FHCS governmentwide average, DHS 

results are lower by a statistically significant amount according to OPM data. 

16Field team participants served as a key source of information during the design process. 

The field team consisted of DHS managers and staff. Details on the objective, scope, and 

methodology for the GAO-administered survey of the field team are described in more 

detail in app. I. 
Page 13 GAO-04-479T 

employees.17 The proposed regulations note that the department will use 

ADR, including an ombudsman, where appropriate. 

The proposal authorizes the Secretary of DHS to identify specific offenses 

for which removal is mandatory. Employees alleged to have committed 

these offenses will have the right to a review by an adjudicating official 

and a further appeal to a newly created panel. Members of this threeperson panel are to be appointed by the Secretary for three-year terms and 

qualifications for these members are articulated in the proposed 

regulations. Members of the panel may be removed by the Secretary “only 

for inefficiency, neglect of duty, or malfeasance.” Qualifications for the 

adjudicating officials, who are designated by the panel, are not specified. 

One potential area of caution is the authority given to the Secretary to 

identify specific offenses for which removal is mandatory. I believe that 

the process for determining and communicating which types of offenses 

require mandatory removal should be explicit and transparent and involve 

a member of key players. Such a process should include an employee 

notice and comment period before implementation, collaboration with 

relevant Congressional stakeholders, and collaboration with employee 

representatives. 

We also would suggest that DHS exercise caution when identifying 

specific removable offenses and the specific punishment. When 

developing these proposed regulations, DHS should learn from the 

experience of the Internal Revenue Service’s (IRS) implementation of its 

mandatory removal provisions.18 We reported that IRS officials believed 

this provision had a negative impact on employee morale and effectiveness 

and had a “chilling” effect on IRS frontline enforcement employees who 

are afraid to take certain appropriate enforcement actions.19 Careful 

drafting of each removable offense is critical to ensure that the provision 

does not have unintended consequences. 

 17U.S. General Accounting Office, Human Capital: The Role of Ombudsmen in Dispute 

Resolution, GAO-01-466 (Washington, D.C.: Apr. 13, 2001). 

18Section 1203 of the IRS Restructuring and Reform Act of 1998 outlines conditions for 

firing of IRS employees for any of ten acts of misconduct. 26 USC 7804 note. 

19U.S. General Accounting Office, Tax Administration: IRS and TIGTA Should Evaluate 

Their Processing of Employee Misconduct Under Section 1203, GAO-03-394 (Washington, 

D.C.: Feb. 14, 2003). 
Page 14 GAO-04-479T 

Moreover, the independence of the panel that will hear appeals of 

mandatory removal actions deserves further consideration. Removal of the 

panel members by the Secretary may potentially compromise the real or 

perceived independence of the panel’s decisions. As an alternative, the 

department should consider having members of the panel removed only by 

a majority decision of the panel. DHS may also wish to consider 

staggering the terms of the members to ensure a degree of continuity on 

the board. 

The DHS proposed regulations recognize the right for employees to 

organize and bargain collectively.20 However, the proposal reduces the 

scope of bargaining by removing the requirement to bargain on matters 

traditionally referred to as “impact and implementation,” which include 

the processes used to deploy personnel, assign work, and use new 

technology, for example, and redefining what are traditionally referred to 

as the “conditions of employment.” A DHS Labor Relations Board is 

proposed that would be responsible for determining appropriate 

bargaining units, resolving disagreements on the scope of bargaining and 

the obligation to bargain, and resolving impasses, and would be separate 

and independent from the Federal Labor Relations Authority (FLRA). The 

Labor Relations Board would have three members selected by the 

Secretary. No member could be a current DHS employee and one member 

would be from FLRA. The FLRA is retained to resolve complaints 

concerning certain unfair labor practices and to supervise or conduct 

union elections. 

Regardless of whether it is as a part of collective bargaining, involving 

employees in such important decisions as how they are deployed and how 

work is assigned is critical to the successful operations of the department. 

During the course of the design process, DHS has recognized the 

importance of employee involvement and has been involving multiple 

organizational components and its three major employee unions in 

designing the new human capital system.21 This is consistent with our 

finding that leading organizations involve unions and incorporate their 

input into proposals before finalizing decisions.22 Engaging employee 

 20Under current law, the rights of employees to bargain may be suspended for reasons of 

national security. 5 U.S.C. Sect. 7103(b), 7112(b)(6). 

21GAO-03-1099. 

22U.S. General Accounting Office, Human Capital: Practices that Empowered and 

Involved Employees, GAO-01-1070 (Washington, D.C.: Sept. 14, 2001). 

Labor Management 

Relations 
Page 15 GAO-04-479T 

unions in major changes, such as redesigning work processes, changing 

work rules, or developing new job descriptions, can help achieve 

consensus on the planned changes, avoid misunderstandings, speed 

implementation, and more expeditiously resolve problems that occur. 

These organizations engaged employee unions by developing and 

maintaining an ongoing working relationship with the unions, 

documenting formal agreements, building trust over time, and 

participating jointly in making decisions. 

DHS employees’ comments can prove instructive when determining the 

balance in labor management relations. In the DHS focus groups, 

employees suggested having informal mechanisms in place to resolve 

issues before the need to escalate them to the formal process and holding 

supervisors accountable for upholding agreements. Supervisors and 

employees also expressed a need for increased training in roles and 

responsibilities in the labor process and an interest in training in ADR. 

Respondents to the GAO survey said the most critical challenge in terms of 

labor relations will be to maintain a balance between the mission of the 

agency and bargaining rights. 

Once DHS issues final regulations for the human capital system, the 

department will be faced with multiple implementation challenges. While 

we plan to provide further details to the Congress on some of these 

challenges in the near future, they include the following. 

Implementing the system using a phased approach. The DHS 

proposed regulations note that the labor relations, adverse actions, and 

appeals provisions will be effective 30 days after issuance of the interim 

final regulations later this year. DHS plans to implement the job 

evaluation, pay, and performance management system in phases to allow 

time for final design, training, and careful implementation. We strongly 

support a phased approach to implementing major management reforms. 

A phased implementation approach recognizes that different organizations 

will have different levels of readiness and different capabilities to 

implement new authorities. Moreover, a phased approach allows for 

learning so that appropriate adjustments and midcourse corrections can 

be made before the regulations are fully implemented organizationwide. 

Providing adequate resources for additional planning, 

implementation, and evaluation. The administration recognizes the 

importance of funding this major reform effort and has requested for fiscal 

year 2005 over $10 million for a performance pay fund in the first phase of 

DHS Faces Multiple 

Implementation 

Challenges 
Page 16 GAO-04-479T 

implementation (affecting about 8,000 employees) to recognize those who 

meet or exceed expectations and about $100 million to fund training and 

the development of the performance management and compensation 

system. In particular, DHS is appropriately anticipating that its revised 

performance management system will have costs related to both 

development and implementation – a fact confirmed by the experience of 

the demonstration projects. In fact, OPM reports that the increased costs 

of implementing alternative personnel systems should be acknowledged 

and budgeted for up front. 

DHS is recognizing that there are up front costs and that its components 

are starting from different places regarding the maturity and capabilities of 

their performance management systems. At the same time, DHS is 

requesting a substantial amount of funding that warrants close scrutiny by 

Congress. In addition, certain costs are one-time in nature and therefore 

should not be built into the base of DHS’s budget for future years. 

Furthermore, presumably most of any performance-based pay will be 

funded from what otherwise would be used from automatic across the 

board adjustments and step increases under the existing GS system. 

The DHS proposal correctly recognizes that a substantial investment in 

training is a key aspect of implementing a performance management 

system. The demonstration projects’ experiences show that while training 

costs are generally higher in the year prior to implementation, the need for 

in-depth and varied training continues as the system is implemented. We 

have reported that agencies will need to invest resources, including time 

and money, to ensure that employees have the information, skills, and 

competencies they need to work effectively in a rapidly changing and 

complex environment.23

Evaluating the impact of the system. High-performing organizations 

continually review and revise their human capital management systems 

based on data-driven lessons learned and changing needs in the 

environment. DHS indicates that it is committed to an ongoing 

comprehensive evaluation of the effectiveness of the human capital 

system, including the establishment of human capital metrics and the use 

of employee surveys. Collecting and analyzing data is the fundamental 

 23U.S. General Accounting Office, Human Capital: A Guide for Assessing Strategic 

Training and Development Efforts in the Federal Government, GAO-03-893G

(Washington, D.C.: July 2003). 
Page 17 GAO-04-479T 

building block for measuring the effectiveness of these approaches in 

support of the mission and goals of the agency. 

DHS should consider doing evaluations that are broadly modeled on the 

evaluation requirements of the OPM demonstration projects. Under the 

demonstration project authority, agencies must evaluate and periodically 

report on results, implementation of the demonstration project, cost and 

benefits, impacts on veterans and other equal employment opportunity 

groups, adherence to merit system principles, and the extent to which the 

lessons from the project can be applied governmentwide. A set of 

balanced measures addressing a range of results, customer, employee, and 

external partner issues may also prove beneficial. An evaluation such as 

this would facilitate congressional oversight; allow for any midcourse 

corrections; assist DHS in benchmarking its progress with other efforts; 

and provide for documenting best practices and sharing lessons learned 

with employees, stakeholders, other federal agencies, and the public. 

Building a DHS-wide workforce plan. DHS has recently begun drafting 

a departmental workforce plan, using the draft strategic plan as a starting 

point. Workforce plans of different levels of sophistication are used in the 

five legacy agencies we studied. Despite their efforts, DHS headquarters 

has not yet been systematic or consistent in gathering relevant data on the 

successes or shortcomings of legacy human capital approaches or current 

and future workforce challenges—a deficiency that will make workforce 

planning more difficult. The strategic workforce plan can be used, among 

other things, as a tool for identifying core competencies for staff for 

attracting, developing, and rewarding contributions to mission 

accomplishment.24

Involving employees and other stakeholders in designing the 

details of the system. We reported last fall that DHS’s and OPM’s effort 

to design a new human capital system were collaborative and facilitated 

participation of employees from all levels of the department.25 We 

recommended that the Secretary of DHS build on the progress that has 

been made and ensure that the communication strategy used to support 

the human capital system maximize opportunities for employee 

involvement through the completion of the design process, the release of 

 24U.S. General Accounting Office, Human Capital: Key Principles for Effective Strategic 

Workforce Planning, GAO-04-39 (Washington, D.C.: Dec. 11, 2003). 

25GAO-03-1099. 
Page 18 GAO-04-479T 

the system options, and implementation, with special emphasis on seeking 

the feedback and buy-in of frontline employees. 

Moving forward, employee perspectives can provide insights on areas that 

deserve particular attention while implementing the new performance 

management system. For example, DHS employees responding to the OPM 

FHCS reported that 

• 37 percent indicated that high-performing employees are recognized or 

rewarded on a timely basis, which is lower than the governmentwide 

average of 41 percent; 

• 60 percent believe that their appraisals are fair reflections of their 

performance, which is lower than the governmentwide average of 65 

percent; 

• 23 percent believe that steps are taken to deal with a poor performer 

who cannot or will not improve, which is lower than the 

governmentwide average of 27 percent; and 

• 28 percent perceive that selections for promotions in their work units 

are based on merit, which is lower than the governmentwide average of 

37 percent. 

In the GAO survey, members of the field team said that the most critical 

challenge in terms of performance management will be to create a system 

that is fair. Such data underscore the continuing need to involve 

employees in the design and implementation of the new system to obtain 

their buy-in to the changes being made. More specifically, employee 

involvement in the validation of core competencies is critical to ensure 

that the competencies are both appropriate and accepted. 

As we testified on the DOD civilian personnel reforms, the bottom line for 

additional performance-based pay flexibility is that an agency should have 

to demonstrate that it has a modern, effective, credible, and as 

appropriate, validated performance management system in place with 

adequate safeguards, including reasonable transparency and appropriate 

accountability mechanisms, to ensure fairness and prevent politicalization 

and abuse of employees. To this end, DHS’s proposed regulations take 

another valuable step towards results-oriented pay reform and modern 

performance management. DHS’s performance management system is 

intended to align individual performance to DHS’s success; hold 

Summary 

Observations 
Page 19 GAO-04-479T 

employees responsible for accomplishing performance expectations; 

provide for meaningful distinctions in performance through performanceand market-based payouts; and be fair, credible, and transparent. 

However, the experiences of leading organizations suggest that DHS 

should require core, and as appropriate, validated competencies in its 

performance management system. The core competencies can serve to 

reinforce employee behaviors and actions that support the DHS mission, 

goals, and values and to set expectations for individuals’ roles in DHS’s 

transformation, creating a shared responsibility for organizational success 

and ensuring accountability for change. DHS should also continue to build 

safeguards into its revised human capital system. 

DHS’s overall effort to design a strategic human capital management 

system can be particularly instructive for future human capital 

management and reorganization efforts within specific units of DHS. Its 

effort can also prove instructive as other agencies design and implement 

new authorities for human capital management. 

Mr. Chairman, Madam Chairwoman, and Members of the Subcommittees, 

this concludes my prepared statement. I would be pleased to respond to 

any questions that you may have. 

For further information, please contact J. Christopher Mihm, Managing 

Director, Strategic Issues, at (202) 512-6806 or mihmj@gao.gov. Major 

contributors to this testimony include Edward H. Stephenson, Jr., Lisa 

Shames, Ellen V. Rubin, Lou V. B. Smith, Tina Smith, Masha PasthhovPastein, Marti Tracy, Ron La Due Lake, Karin Fangman, Michael Volpe, 

and Tonnye Conner-White. 

Contacts and 

Acknowledgments 
Page 20 GAO-04-479T 

In presenting our preliminary observations on the Department of 

Homeland Security’s (DHS) regulations, we reviewed the proposed human 

capital regulations issued jointly by DHS and the Office of Personnel 

Management (OPM) on February 20, 2004, in the Federal Register. 

Additional documents reviewed include relevant laws and regulations, the 

52 DHS human capital system options released in October 2003, and 

testimony presented by leaders of DHS employee unions and the Merit 

Systems Protection Board (MSPB). Interviews with experts in federal 

labor relations and the federal adverse actions and appeals system 

provided additional insights. The official transcripts and report 

summarizing the proceedings of the Senior Review Advisory Committee 

meetings in October 2003 were also examined. A draft of the report 

summarizing the proceedings of the Senior Review Advisory Committee 

meetings in October 2003 was reviewed by members of the committee to 

ensure its reliability. Additionally, we attended the committee’s October 

2003 meetings. Relevant GAO reports on human capital management were 

used as criteria against which the proposals were evaluated. 

To respond to your particular interest in seeking out and incorporating 

employee perspectives on the human capital system, we gathered 

information on employee perceptions from a variety of sources and 

presented these findings throughout the statement. Insights to employee 

opinions were gathered from the OPM Federal Human Capital Survey 

(FHCS), a GAO-administered survey of the field team used to inform the 

human capital system design effort (GAO survey), and a report 

summarizing findings from the DHS focus groups held during the summer 

of 2003. 

To assess the strengths and weaknesses of selected provisions of DHS’s 

proposed human capital system, we reviewed the analysis of the DHS 

component agencies’ responses to relevant questions on OPM’s FHCS of 

2002 for those legacy components that are now within DHS: the Animal 

and Plant Health Inspection Service (APHIS); the U.S. Coast Guard; the 

U.S. Customs Service; the Federal Emergency Management Agency; the 

Immigration and Naturalization Service; Federal Law Enforcement 

Training Center; U.S. Secret Service; Office of Emergency Preparedness 

and National Disaster Medical System; and the Federal Protective Service. 

This governmentwide survey was conducted from May through August 

2002. It was administered to employees of 24 major agencies represented 

on the President’s Management Council, which constitute 93 percent of 

the executive branch civilian workforce. There were 189 

subelement/organizational components of the 24 agencies that 

Appendix I: Methodology 

OPM Federal Human 

Capital Survey 
Page 21 GAO-04-479T 

participated. The sample was stratified by employee work status: 

supervisory, nonsupervisory, and executive. Of the more than 200,000 

employees contacted, a little over 100,000 employees responded to the 

survey, resulting in a 51 percent response rate. OPM reported that the 

margin of error for the percentages of respondents governmentwide was 

plus or minus 1 percent at a 95 percent confidence interval. Likewise, it 

reported that the margin of error for the percentages of respondents for 

individual agencies was somewhat higher but less than plus or minus 5 

percent. 

The OPM survey was conducted during the same time frame that the 

administration proposed legislation to form DHS; thus, the opinions 

expressed by the respondents to the survey were before the formation of 

DHS. For reporting purposes, OPM compiled the DHS responses by 

combining the various subentities cited above. The responses approximate 

the views of some, but not all, employees now at DHS. For example, the 

Transportation Security Administration (TSA) screeners were not hired at 

the time of the survey. Also, APHIS employees were divided between DHS 

and the Department of Agriculture (USDA), so the APHIS respondents 

included some employees who remained at USDA. 

Because OPM did not provide us with a copy of the full survey data set 

that included all records or the strata weights for any of the records, we 

could not perform our own analyses of the data or calculate the 

confidence intervals that would be associated with such analyses. OPM 

did, however, provide us with access to a Web site that provided reports 

with weighted data analyses for the FHCS 2002. We addressed the 

reliability of the survey analyses by (1) reviewing existing information 

about the survey data collection and analysis processes and (2) 

interviewing OPM agency officials who were knowledgeable about the 

data. We determined that the data were sufficiently reliable for the 

purposes of this testimony. We reviewed the analyses of the DHS 

component agencies presented on the Web site in four areas (pay and 

performance management, classification, labor relations, and adverse 

actions and appeals) that compared DHS-wide data to governmentwide 

data. 

We were interested in obtaining the views of the field team participants 

who served as a key source of information for DHS’s Core Design Team. 

The field team consisted of DHS managers and staff. Members were 

selected by departmental management or the three major unions. 

GAO Field Team Survey 
Page 22 GAO-04-479T 

From October through December 2003, we surveyed the 31 members of 

the team to obtain their insights into the DHS design process and 

proposed human capital system options. The survey, administered by email and fax, contained two parts. The first part addressed their views on 

how effectively the field team was utilized throughout the design process. 

The second part addressed their views about human capital challenges 

and the proposed policy options in four areas: (1) pay and classification, 

(2) performance management, (3) labor relations, and (4) discipline and 

appeals. Prior to distribution, the questionnaire was reviewed by DHS and 

OPM officials and pretested with a field team member to ensure clarity of 

the questions and determine whether the respondent had the knowledge 

to answer the questions. The questionnaire was revised based on their 

input. We received completed questionnaires from 19 of 31 field team 

members. We aggressively followed up with nonrespondents by telephone 

and e-mail. Because many of the field team members were either not 

based in offices, on extensive travel, or difficult to reach, we extended our 

survey through December 2003. The views that we obtained are not 

representative of all the participants. 

DHS conducted multiple focus groups and Town Hall meetings from the 

end of May through the beginning of July 2003 in 10 cities across the 

United States.1

 Six focus group sessions were held in each city to obtain 

employee input and suggestions for the new human resource system. In 

most cities, five of the six sessions were devoted to hearing employees’ 

views while the remaining sessions heard the views of supervisors and 

managers. Each focus group was facilitated by a contractor. The 

contractor used a standard focus group facilitation guide to manage each 

session. Additionally, the contractor was responsible for recording the 

issues identified during each focus group session and compiling a 

summative report on the findings from all the focus groups. We did not 

attend any focus group sessions and were not able to review any original 

notes from the sessions to assess the accuracy of the summative report. 

Participation in the focus groups was not random nor was it necessarily 

representative of DHS employees. DHS reports that employee 

participation generally reflected the population in that location. For 

 1

The 10 cities were Atlanta, Georgia; Detroit, Michigan; El Paso, Texas; Los Angeles, 

California; Miami, Florida; New York, New York; Norfolk, Virginia; Seattle, Washington; 

Washington, D.C.; and Baltimore, Maryland. 

DHS Focus Groups 
Page 23 GAO-04-479T 

example, the level of bargaining unit representation at the focus groups 

was determined based on OPM data on bargaining unit membership. 

Bargaining unit employees were selected by union representatives to 

participate in the focus groups, while nonbargaining unit employees and 

supervisors were selected by DHS management. Union representatives 

and DHS managers were asked to select a diverse group of participants 

based on occupation, work location, gender, ethnicity, and age. 

This work was done in accordance with generally accepted government 

auditing standards from March 2003 through February 2004. 

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